oversight

March 2002

Published by the Farm Credit Administration, Office of Inspector General on 2002-03-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

April 30, 2002




The Honorable Michael M. Reyna
Chairman of the Board and
 Chief Executive Officer
Farm Credit Administration
McLean, Virginia 22101

Dear Mr. Reyna:

Enclosed is the semiannual report on the activities of the Farm Credit Administration’s (FCA or
Agency) Office of Inspector General (OIG) for the period from October 1, 2001 through
March 31, 2002. We are filing this report in accordance with the Inspector General Act of 1978,
as amended (Act). This is the twenty-sixth report since creation of the office on January 22,
1989. Section 5(b) of the Act requires that you send this report to the appropriate Congressional
committees and subcommittees within 30 days after the date of this transmittal, with
management’s report on the status of audit recommendations.

I would like to complement you and Board Member Jorgensen for your diligence in focusing
management on the resolution of agreed upon actions. Monthly reporting to the FCA Board
members by the Audit Follow-up Official combined with appropriate questions to the parties
responsible for taking action has resulted in a greater emphasis on meaningful corrective
actions. Management completed final action on 15 agreed upon actions. Actions have also
become more timely with management completing final action on 9 of the 15 most recent agreed
upon actions.

I am looking forward to continuing our relationship and helping the Agency in making positive
changes, becoming a better place to work, and being a more efficient organization. We
appreciate the confidence you and the Board have expressed in our work and the constructive
relationship that it demonstrates.

Respectfully,



Stephen G. Smith
Inspector General



Enclosure
                                         FCA SEMIANNUAL REPORT TO CONGRESS
                                            OCTOBER 1, 2001 – MARCH 31, 2002



                                             CONTENTS

REPORTING REQUIREMENTS ______________________________________________________________ ii
BACKGROUND ____________________________________________________________________________ 1
MANAGEMENT CHALLENGES _____________________________________________________________ 1
  ORGANIZATIONAL LEADERSHIP _______________________________________________________________ 1
  FARM CREDIT SYSTEM RISK _________________________________________________________________ 2
  FINANCIAL MANAGEMENT ___________________________________________________________________ 2
  SECURITY ________________________________________________________________________________ 2
  HUMAN CAPITAL___________________________________________________________________________ 2
  LEVERAGING TECHNOLOGY__________________________________________________________________ 2
AUDIT AND INSPECTION REPORTS ISSUED _________________________________________________ 2
  OFFICE OF CHIEF FINANCIAL OFFICER _________________________________________________________ 3
  INDEPENDENT FINANCIAL AUDIT ______________________________________________________________ 3
  PERSONNEL SECURITY PROGRAM _____________________________________________________________ 3
  STUDY OF THE EARLY WARNING SYSTEM _______________________________________________________ 3
STATUS OF UNIMPLEMENTED AGREED UPON ACTIONS ____________________________________ 4
  AUDITS___________________________________________________________________________________ 4
  INSPECTIONS ______________________________________________________________________________ 4
  INVESTIGATIONS ___________________________________________________________________________ 5
  LEGISLATION AND REGULATIONS _____________________________________________________________ 5
  AGENCY FINANCIAL MANAGEMENT SYSTEM ____________________________________________________ 5
  OTHER ACTIVITIES _________________________________________________________________________ 6
   Management Advisories____________________________________________________________________ 6
   Security Briefing _________________________________________________________________________ 6
   Survey of Farm Credit System Institutions______________________________________________________ 6
   OIG Performance Measures_________________________________________________________________ 6
   Staff Participation in Activities of the Professional Community______________________________________ 6
   Staff Participation in Agency Organizations_____________________________________________________ 7
Appendices
  AUDIT / INSPECTION REPORTS ISSUED BY FCA OIG ______________________________________________ 8
  INSPECTOR GENERAL ISSUED REPORTS WITH QUESTIONED COSTS __________________________________ 9
  INSPECTOR GENERAL ISSUED REPORTS WITH RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE __ 10
  FARM CREDIT ADMINISTRATION ORGANIZATION CHART _________________________________________ 11
  FCA OFFICE OF INSPECTOR GENERAL ORGANIZATION CHART ____________________________________ 12




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                                                            FCA SEMIANNUAL REPORT TO CONGRESS
                                                               OCTOBER 1, 2001 – MARCH 31, 2002




  REPORTING REQUIREMENTS

INSPECTOR GENERAL ACT CITATION AND REQUIREMENT                                                                              PAGE

Section 4(a)(2) Review of Legislation and Regulations ......................................................................... 5

Section 5(a)(1) Significant Problems, Abuses and Deficiencies........................................................ none

Section 5(a)(2) Recommendations With Respect to Significant ........................................................ none
     Problems, Abuses and Deficiencies

Section 5(a)(3) Prior Recommendations Not Yet Implemented...........................................................4-5

Section 5(a)(4) Matters Referred to Prosecutive Authorities .............................................................. none

Section 5(a)(5) Summary of Instances Where Information ............................................................... none
     and 6(b)(2) Was Unreasonably Refused or Not Provided

Section 5(a)(6) List of OIG Audit/Inspection Reports............................................................................3-4

Section 5(a)(7) Summary of Each Particularly Significant Report........................................................3-4

Section 5(a)(8) Statistical Table on Management Decisions................................................................. 8
     on Questioned Costs

Section 5(a)(9) Statistical Table on Management Decisions on............................................................ 9
     Recommendations That Funds Be Put To Better Use

Section 5(a)(10) Summary of Each Audit Over Six Months Old for .................................................. none
     Which No Management Decision Has Been Made

Section 5(a)(11) Significant Revised Management Decisions ........................................................... none

Section 5(a)(12) Significant Management Decisions With Which ..................................................... none
     the Inspector General Disagrees

Section 5(a)(13) Compliance of Agency Financial Management System ............................................ 5




                                                                                     ii
                        ACCOMPLISHMENTS




We issued two audit reports, one inspection report and one review
during this period. Based on recommendations and agreed upon
actions made in these and earlier reports, as well as other Office of
Inspector General activity, we achieved the following:

   Issued audit of the Office of Chief Financial Officer. Identified
   approximately $196,000 in questioned cost and $49,00 in funds be
   put to better use.

   Contracted with Harper, Rains, Stokes & Knight’s, P.A. for audit of
   FCA’s financial statement. FCA received an unqualified opinion.

   Continued to help the Agency make progress toward a streamlined
   planning process. Office budget and operating plans have been
   integrated, along with basic workforce planning so that each office
   has a consolidated operating and performance plan. These plans link
   resources to performance goals and the Agency’s strategic plan.

   Completed an inspection of the Personnel Security Program.
   Inspection revealed that although the Agency has well written
   procedures in place, they are not always being followed.

   Contracted with Delclos/Walsh Associates for a study of the
   Agency’s Early Warning System.       The study was highly
   complementary of the quality and professionalism of the work
   produced by FCA examiners.

   Contributed to improving practices concerning FCA’s requirements
   for the use of social security numbers.

   Provided information to improve the marketing of FCA to perspective
   employees. Additionally, provided a mechanism for the Agency to
   measure its operations from departing employees.
                                      FCA SEMIANNUAL REPORT TO CONGRESS
                                         OCTOBER 1, 2001 – MARCH 31, 2002




 BACKGROUND


         The FCA is an independent Federal agency of the United States government responsible
         for the regulation, examination and supervision of institutions chartered under the Farm
         Credit Act of 1971, as amended. FCA is a nonappropriated agency with a fiscal year (FY)
         2002 budget of $38,033,000 for administrative costs. The FY 2002 budget for the Office
         of Inspector General (OIG) is $829,601. FCA is a “designated Federal entity” within the
         meaning of the Inspector General Act of 1978, as amended.

         FCA currently has 265 employees, about half of which are examiners located at five field
         offices. Also included in the Agency positions are five approved positions for the OIG.
         Appendix II displays the current organizational structure of FCA and Appendix III displays
         the OIG within that structure.



 MANAGEMENT CHALLENGES


         This section of the report outlines major challenges confronting the Farm Credit
         Administration as it works to fulfill its mission. These challenges fall into two general
         categories. First are the challenges related to the FCA’s core mission of ensuring a
         dependable supply of credit to agriculture through the institutions it has chartered. These
         challenges are often shaped and influenced by events that are outside the control of the
         Agency. Second, but no less important, are those challenges related to the Agency’s
         operations. These management challenges were incorporated in the previous semiannual
         report but have been updated to reflect changes and progress in meeting the challenges.

Organizational Leadership

         The Farm Credit Act provides for a full time three-member Board of Directors. The Board
         members are appointed by the President and confirmed by the Senate. The rapidly
         changing complex financial and banking environment makes the Board’s task both
         challenging and important. The Board must be able to engage in healthy professional
         policy debate and set a sound course for the Agency. A full strength Board is an important
         element in setting clear priorities and deliberating fully on the issues. In the 15 years since
         the inception of the FCA Board, it has been at full strength for less than half of that time. It
         has been missing one Board member since January 2000 except for a brief 20-day
         period.

         A relatively small full-time Board also presents a challenge in terms of defining the roles
         and responsibilities of the Board members relative to the governance of the Agency. As
         the membership on the Board changes, it needs to update its rules of operation to ensure
         it fulfills its statutory role in the governance of FCA.




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                                      FCA SEMIANNUAL REPORT TO CONGRESS
                                         OCTOBER 1, 2001 – MARCH 31, 2002


Farm Credit System Risk

           The Farm Credit System (FCS) is a single industry lender and therefore is vulnerable to
           economic swings in the industry. The Farm Credit Administration is challenged to balance
           the often-competing demands of ensuring the FCS fulfills it public purpose, proactively
           examining risk in the regulated institutions both individually and systemically, and
           controlling the cost of the regulator.

Financial Management

           FCA’s financial management system has undergone almost continuous change over the
           past five years. During this reporting period, the Agency completed its first financial
           statement using the services of the Department of Interior’s National Business Center.
           With a successful implementation, management’s challenge will be to leverage the system
           to deliver timely financial information that is critical to well informed management
           decisions.

Security

           In the aftermath of the events of September 11, 2001, security remains a major challenge
           for the Agency. In the recent report on information security, the OIG found a strong
           foundation for security practices. However, the speed of change in the security
           environment will be a challenge for all government organizations. This is especially true
           for smaller organizations like FCA where an increased emphasis on physical and
           information security will compete with program areas for tight budget funding.

Human Capital

           FCA needs to develop a comprehensive, integrated approach to human capital issues.
           The FCA has not adopted a human capital strategy. In light of the changes in the
           competitive environment, advances in technology, and the tenure of its workforce, FCA
           needs to closely evaluate business processes, their associated costs, and alternatives.

Leveraging Technology

           The Agency has recognized that in order to meet the constraints of its budget, it must be
           able to maximize its return on investment in technology. FCA will need effective
           mechanisms to ensure that current and future staff has the technical skills to use
           technology to operate in an efficient manner.



 AUDIT AND INSPECTION REPORTS ISSUED


           We issued an audit of the Office of Chief Financial Officer (OCFO) and an inspection of
           the Personnel Security Program during this reporting period. We also issued reports on
           the FCA Financial Statements as of September 30, 2001. We conduct all audits in
           accordance with audit standards established by the Comptroller General of the United
           States for audits of Federal organizations, programs, activities, and functions. Inspections
           are conducted in accordance with the President’s Council on Integrity and Efficiency’s


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                                     FCA SEMIANNUAL REPORT TO CONGRESS
                                        OCTOBER 1, 2001 – MARCH 31, 2002

          Quality Standards for Inspections. In addition to the audit and inspection reports, we
          issued a study of the Agency’s Early Warning System. Copies of all OIG reports are
          available on FCA’s Web site (www.fca.gov/oig), by contacting the Inspector General’s (IG)
          office on 703/883-4030, or by e-mail at IG_information@fca.gov.

Office of Chief Financial Officer

              The OIG completed an audit of the OCFO at the FCA. The objectives of this audit
              were to evaluate whether the OCFO was operating efficiently and determine whether
              initiatives to improve the office have been effective. We found that the implementation
              of the Federal Financial System is a promising step towards improving the OCFO
              efficiency. However, OCFO still lacks key elements to ensure the office is operating in
              the most cost effective manner. Specifically, the Chief Financial Officer is not
              effectively managing staff, the OCFO is not issuing financial products timely and funds
              are wasted on products and services. As a result in FY 2001 OCFO expended
              approximately $196,000 in questioned costs and $49,000 in funds be put to better
              use. Management agreed to recommendations to develop a workforce planning
              strategy; improve staff skills; provide timely financial data; and manage expenditures
              more efficiently.

Independent Financial Audit

              In December 2001, the OIG transmitted Harper, Rains, Stokes & Knight’s, P.A.
              (HRSK) reports on the audit of the FCA’s financial statements for the fiscal year
              ended September 30, 2001. HRSK issued an unqualified opinion. HRSK opined the
              financial statements present fairly, in all material respects, the financial position of
              FCA as of September 30, 2001 and 2000, in conformity with generally accepted
              accounting principles. HRSK issued two other reports. The report on the internal
              control noted no matters involving the internal control and its operation that HRSK
              considered to be material weaknesses. The HRSK report on compliance with laws
              and regulations did not note any instances of noncompliance. In addition to the three
              reports, a management letter was also issued.

Personnel Security Program

              The OIG completed an inspection of the Personnel Security Program. The objective
              of this inspection was to evaluate the progress made in addressing seven suggested
              actions contained in an OIG Management Letter to strengthen FCA’s Personnel
              Security Program, dated May 10, 1999. We found that management addressed the
              suggested actions made in the OIG Management Letter. However, employees have
              not always been following the procedures that were revised to address the
              weaknesses found in the letter. Further, we found the personnel security program at
              FCA still lacks emphasis on its importance to the Agency. In short, although the
              Agency’s policies and procedures are thorough and well written, employees are not
              judiciously following those procedures. Additionally, we found that records were
              inaccurate, position sensitivity levels need updating, and personnel security
              procedures are not consistently being followed.

Study of the Early Warning System

              The OIG contracted with Delclos/Walsh Associates to study the Early Warning
              System (EWS) used by the Office of Examination. The study was highly


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                                         FCA SEMIANNUAL REPORT TO CONGRESS
                                            OCTOBER 1, 2001 – MARCH 31, 2002

                 complementary of the quality and professionalism of the work produced by examiners.
                 It found the EWS is an effective quality control tool for the Office of Examination.
                 However, it is not necessarily a mechanism that predicts quality conditions of
                 institutions in the future. The study includes several suggestions that could help the
                 Agency leverage its investment in the EWS.



 STATUS OF UNIMPLEMENTED AGREED UPON ACTIONS


             At the beginning of the period there were 16 unimplemented agreed upon actions. During
             the reporting period, management took final action on six of these. Two were from audit
             reports and four were from inspection reports. During this period, 15 additional agreed
             upon actions resulted from two reports, one inspection report and one audit report. At the
             end of this reporting period, 16 agreed upon actions remain open, 14 from two audits and
             two from an inspection.


Audits

             The following table summarizes the final actions management took on open agreed upon
             actions. One new audit report was issued concerning OCFO containing 9 agreed upon
             actions.

                                          AUDIT AGREED UPON ACTIONS

                                                                              Final
                                                       Open during
                                                                          Management          Open on
                          Audit Report                 this 6-month
                                                                         Actions during       4/01/2002
                                                          period
                                                                           this period
Performance Budgeting
………Issued March 23, 2001                                     12                 2                 10
Office of Chief Financial Officer
………Issued January 24, 2002                                    9                 5                  4

             Totals                                          21                 7                 14


             The audit report of Performance Budgeting was issued more than 12 months ago. Ten of
             the original 14 agreed upon actions remain open. This audit found that although the
             Agency currently creates many planning documents, a more streamlined and cohesive
             planning process is needed. The Agency should consolidate individual office planning
             documents to enable the Board to have more comprehensive information linking office
             resources and goals to the Agency’s Strategic Plan and performance measures. We also
             found two areas, financial planning and human capital planning, that need to be
             addressed.

Inspections

             Management took final action to close four remaining agreed upon actions on the
             Affirmative Employment Program Action Plan inspection. An inspection report was issued


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                                      FCA SEMIANNUAL REPORT TO CONGRESS
                                         OCTOBER 1, 2001 – MARCH 31, 2002

           this period on the Agency’s Personnel Security Program that resulted in 6 agreed upon
           actions. However, management took action to close 4 of those agreed upon actions
           during this reporting period. At the end of the reporting period, only one inspection has
           open items. The following table lists final actions on agreed upon actions from the
           inspections.




                                    INSPECTION AGREED UPON ACTIONS

                                                                             Final
                                                     Open during
                                                                         Management          Open on
               Inspection Report                     this 6-month
                                                                        Actions during       4/01/2002
                                                        period
                                                                          this period
Affirmative Employment Program Action Plan
..............Issued May 23, 2001                           4                  4                  0
Personnel Security Program
..............Issued December 20, 2001                      6                  4                  2

           Totals                                          10                  8                  2


Investigations

           Most OIG Hotline calls dealt with Farm Credit System borrower complaints and were
           referred to the FCA office responsible for researching such matters. Four other complaints
           were received through the OIG Hotline or written correspondence. All four of these
           complaints were closed after a preliminary review showed that the allegations were
           unsubstantiated. All other Hotline calls and emails were not investigative in nature and
           were referred to the appropriate FCA office or other Federal agency.

           There was one open investigation at the beginning of this reporting period. This open
           investigation was closed during this period resulting in advice on changing a Board policy.
           Two new investigations were opened this period, with one being closed unsubstantiated.
           Currently there is one investigation open.

Legislation And Regulations

           We reviewed several FCA regulations in both proposed and final form. We also reviewed
           statutory and regulatory compliance issues as they arose in audits and investigations. We
           have reviewed and commented on proposed legislation affecting the Inspectors General
           community through the legislation committee of the President’s Council on Integrity and
           Efficiency (PCIE) and the Executive Council on Integrity and Efficiency (ECIE).

Agency Financial Management System

           The financial management system has been a serious management challenge facing the
           Agency. The Federal Financial Management Improvement Act of 1996 (FFMIA) requires
           agencies to implement and maintain financial management systems that substantially
           comply with Federal financial management requirements, government accounting
           standards, and the United States government standard general ledger. The FFMIA also
           requires the OIG to report on the Agency’s compliance.


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                                      FCA SEMIANNUAL REPORT TO CONGRESS
                                         OCTOBER 1, 2001 – MARCH 31, 2002

          Management implemented Federal Financial System (FFS) as managed by the
          Department of Interior (DOI) National Business Center. The implementation of FFS
          corrected previously reported systemic weaknesses. The audit of the financial statements
          for the fiscal year ended September 30, 2001, did not note any non-compliance with laws
          or regulations including FFMIA.

Other Activities

          Management Advisories

              During this reporting period, the OIG has continued the use of management
              advisories. These advisories provide management with feedback on issues that
              come to our attention during the process of performing other OIG work. In this
              6-month period, we advised Agency managers on issues including a Board policy on
              operational responsibilities, professional memberships for employees, financial
              management, mail handling, emergency preparation, employee exit interviews, and
              use of social security numbers by FCA.

          Security Briefing

              To heighten awareness of risks in today’s post 9/11 world, OIG hosted a briefing by
              experts on personal security. OIG is planning another briefing on identity theft during
              the upcoming period.

          Survey of Farm Credit System Institutions

              OIG administers an ongoing Agency survey of the regulated institutions of the FCS.
              This survey program is designed to provide the FCA Board and senior management
              with independent feedback about how well FCA performs its examination and
              enforcement activities. This feedback is based on confidential responses received
              from FCS institutions. We survey the chairman of the board and the chief executive
              officer of each FCS institution following their receipt of FCA’s report of examination for
              their voluntary feedback on the quality and consistency of the examination and
              enforcement processes. OIG reports the results of the survey annually. During this
              period we mailed 50 surveys and received 43 responses. This is an 86 percent
              response rate. Overall, the average rating for the questions answered during this
              reporting period was very good (1.38) [1=completely agree; 5=completely disagree]
              which improved since the last reporting period (1.68).

          OIG Performance Measures

              OIG developed performance measures during FY 1995 and implemented them in
              FY 1996. We have refined the measures in each subsequent year. The FY 2001
              OIG Performance Report is available on the OIG Web page. We welcome feedback.

          Staff Participation in Activities of the Professional Community

              OIG staff members are encouraged to take part in organizations that contribute to the
              mission of the Inspector General community, as well as their individual professional
              development. Most staff are actively involved in one or more professional
              organizations as well as ad hoc activities of the PCIE/ECIE.



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                         FCA SEMIANNUAL REPORT TO CONGRESS
                            OCTOBER 1, 2001 – MARCH 31, 2002

Staff Participation in Agency Organizations

   Staff is active on several Agency workgroups and task forces. During this reporting
   period the OIG was represented on Blacks in Government, Fellow in Council for
   Excellence in Government, Employees’ Council, Administrative Burden Reduction
   Workgroup, the Federal Women’s Program and the Budget and Planning task force.




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                                   FCA SEMIANNUAL REPORT TO CONGRESS
                                      OCTOBER 1, 2001 – MARCH 31, 2002

                                                                               APPENDIX I




AUDIT / INSPECTION REPORTS ISSUED BY FCA OIG




                                   NUMBER OF                                 RECOMMENDATIONS
                                RECOMMENDATIONS/                            THAT FUNDS BE PUT TO
      TITLE OF REPORT          AGREED UPON ACTIONS       QUESTIONED COSTS       BETTER USE


   Office of Chief Financial            9                    $ 196,000            $49,000
            Officer


 Personnel Security Program             6                        $0                 $0


     Agency Financial                   0                        $0                 $0
    Statements FY 2001


            Total                      15                    $ 196,000            $49,000




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                                            FCA SEMIANNUAL REPORT TO CONGRESS
                                               OCTOBER 1, 2001 – MARCH 31, 2002




                                                                                             APPENDIX Ia




INSPECTOR GENERAL ISSUED REPORTS WITH QUESTIONED COSTS



                                                           Number                        Dollar Value

                                                                            Questioned Costs      Unsupported
                                                    Reports       Recs.                              Costs
                                                      0            0                $0                $0
A.   For which no management decision
     has been made by the commencement
     of the reporting period


B.   Which were issued during the                      1            2             $196,000              $0
     reporting period

                                                       0            0               $0                  $0
Subtotals (A+B)

                                                       0            0               $0                  $0
C.   For which a management decision was
     made during the reporting period

                                                       0            0               $0                  $0
     (i) dollar value of disallowed costs

                                                                                                        $0
     (ii) dollar value of costs not disallowed         1            2             $196,000

                                                       0            0               $0                  $0
D.   For which no management decision
     has been made by the end of the
     reporting period

                                                       0            0               $0                  $0
E.   For which no management decision
     was made within six months of
     issuance




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                                        FCA SEMIANNUAL REPORT TO CONGRESS
                                           OCTOBER 1, 2001 – MARCH 31, 2002




                                                                                          APPENDIX Ib

INSPECTOR GENERAL ISSUED REPORTS WITH
RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE



                                                                         Number


                                                               Reports            Recs.         Dollar Value

A. For which no management decision has been
   made by the commencement of the reporting                     0                 0                $0
   period


B. Which were issued during the reporting period                 0                 0                $0


Subtotals (A + B)                                                0                 0                $0


C. For which a management decision was made
                                                                 1                 1              $49,000
   during the reporting period


    (i) dollar value of recommendations            that
                                                                 1                 1              $49,000
        were agreed to by management


        --based on proposed management
                                                                 1                 1              $49,000
          action


        -- based on proposed legislative action                  0                 0                $0


    (ii) dollar value of recommendations           that
                                                                 0                 0                $0
         were not agreed to by management


D. For which no management decision has been
                                                                 0                 0                $0
   made by the end of the reporting period


E. For which no management decision was made
                                                                 0                  0               $0
   within six months of issuance




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                                                                              APPENDIX II
                                                     FCA SEMIANNUAL REPORT TO CONGRESS



Farm Credit Administration Organization Chart




                                                11
                                                                    APPENDIX III
                              FCA SEMIANNUAL REPORT TO CONGRESS
                                 OCTOBER 1, 2001 – MARCH 31, 2002




FCA Office of Inspector General Organization Chart




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